CalPERS to Cut Investment Fees by 8 Percent Next Year

Calpers

CalPERS calculates that it will cut investment-related fees by 8 percent in fiscal year 2015-16, according to a report by Bloomberg.

The pension fund has been looking to cut costs recently by reducing the number of private equity managers it invests with and moving more investment management in-house.

According to CalPERS’ proposed budget, obtained by Bloomberg, the 8 percent decrease in fees will come from several areas:

Calpers projects it will pay about $100 million less in fees for hedge-fund investments. The pension has said it would take about a year to unwind all its holdings. It paid $135 million in fees in the fiscal year that ended June 30 for hedge-fund investments, which earned 7.1 percent and added 0.4 percent to its total return, according to Calpers figures.

Brad Pacheco, spokesman for the pension fund, wasn’t immediately available for comment.

Base fees for private-equity investments are projected to decline 7.5 percent to $440.6 million as some investments matured, the number of managers was reduced and Calpers won better terms for new deals.

Base fees for company stock managers are projected to increase 25 percent to $51.3 million. Fees for performance are projected to decrease by $32.6 million because of favorable renegotiated contract terms, Calpers said.

[…]

The largest U.S. state pension fund, known as Calpers, projects that it will pay $930.7 million in base and performance fees to investment firms in the fiscal year that begins July 1, down from more than $1 billion this year and $1.3 billion last year, according to the fund’s proposed budget.

CalPERS managed $295.8 billion in assets as of December 31, 2014.

 

Photo by  rocor via Flickr CC License

Pension Transparency Bill Moves Forward in Kentucky House

kentucky

A bill is moving forward in the Kentucky House that would increase the transparency around investments made by the state’s retirement systems.

The Senate unanimously passed the measure last month.

The bill would require the state’s pension funds to disclose the use of placement agents, any fees paid to those agents, and more. An official summary of the bill from Legiscan:

[The bill] require[s] the Judicial Retirement Plan, the Legislators’ Retirement Plan, the Kentucky Retirement Systems, and the Kentucky Teachers’ Retirement System to establish by reference in administrative regulation a placement agent disclosure policy; require the policy to disclose, at a minimum, to the boards of trustees of the plans and systems the name of the placement agent, dollar value of investment, and the fees or payments made to placement agent for each investment in which a placement agent was utilized; define placement agent; require the plans and systems to submit a quarterly update of the information disclosed to the respective boards of trustees to the Government Contract Review Committee; provide that the disclosure shall apply to contracts established or renewed on or after July 1, 2015.

The Senator sponsoring the bill, Chris McDaniel [R], told the State-Journal:

“The fact of the matter is there is nothing that forces them to disclose this to the General Assembly right now and by extension the public,” McDaniel said. “It’s important people know where money is and isn’t placed, the kinds of returns we are getting and to really force that.

“This will require that they do these things. It’s a bill that public employees want to see pass. It’s a bill transparency advocates want to see pass be it conservative, liberal or otherwise. People want to know how their tax dollars are being spent. I’m optimistic the House will pick it up.”

The bill is called Senate Bill 22.

 

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Chicago Treasurer: Investment Firms Overcharging Chicago Pensions By $50 Million

chicago

Chicago’s new Treasurer, Kurt Summers, said last week that he believes investment firms are overcharging the city’s pension funds to the tune of $50 million annually.

Summers says firms are levying higher fees on the city’s smaller pension funds than on the larger funds, for the same work.

From DNA Info:

Since taking office in December, Summers claims he’s discovered that investment managers are wringing upwards of $50 million a year in extra fees out of the city and Cook County’s 10 employee pension funds by charging substantially higher fees to the smaller pension funds for the exact same investments.

“I don’t begrudge any firm from making as much money as it can, that’s what they’re in the business to do,” Summers said in an interview last week. “It’s our fault for operating in silos and not looking at this sooner.”

Summers said when he came into office he found that just 23 firms are raking in half of the $142 million in fees the pension funds pay out to manage $35 billion in funds.

“Let’s go have 23 conversations,” Summers said. “Let’s start with the firms who have gotten plenty of their fair share.”

[…]

Summers plan is to aggregate pricing, similar to New York City’s system, and convince investment managers to offer the lowest fee to all the pension funds, not just the largest ones.

He said he’s already spoken with four firms and gotten a commitment from one to lower fees by a third.

Summers has previously advocated using pension money to make direct investments within Chicago.

 

Photo by bitsorf via Flickr CC License

Pensions Criticize KKR Over Fee Refund Spurred by SEC Exam

SEC-Building

Some pension funds are criticizing KKR’s communication with investors regarding “erroneously” charged fees; the firm refunded those fees last year, but waited a year tell investors that the refund was the result of an SEC exam.

From the Wall Street Journal:

KKR & Co. is getting unusually pointed criticism from some of its public-pension fund investors, after they discovered that KKR didn’t tell them for almost a year that its decision to refund some money was prompted by a regulatory exam.

The contretemps, rare in the tightly-controlled world of private equity, stems from a Securities and Exchange Commission exam of the industry giant in late 2013. Regulators found that the firm had erroneously charged some expenses and didn’t fully disclose it was collecting certain fees, according to a document obtained from one of KKR’s largest investors, the Washington State Investment Board.

As a result of the SEC findings, the private-equity giant in early 2014 refunded money to investors in some of its buyout funds.

As a result of the SEC findings, the private-equity giant in early 2014 refunded money to investors in some of its buyout funds.

Several KKR investors said they were informed of a fee credit but didn’t learn the reason until after The Wall Street Journal last month broke the news about the SEC exam findings and the refunds.

Read the full Journal article here.

 

Photo by Securities and Exchange Commission via Flickr CC License

Preqin Tells Private Equity to Heed the “Power of the Limited Partner” After CalPERS’ Cuts

Calpers

Research firm Preqin has released a note reacting to CalPERS’ cutting of private equity managers.

The firm notes that limited partners are beginning to wield more negotiating power, and cautions private equity firms to consider CalPERS’ actions an “effective statement” on the power of limited partners.

More from Chief Investment Officer:

Private equity fund managers should take heed of the California Public Employees’ Retirement System’s (CalPERS) overhaul of its allocation to the asset class and focus on justifying the terms they present to clients, according to Preqin.

The research firm was responding to last week’s announcement by CalPERS that it wanted to drastically reduce the number of private equity managers it uses in order to cut costs.

“The decision by CalPERS may not immediately result in a drop in overall commitments to private equity funds,” Preqin said in a research note, “but serves as an effective statement to fund managers on the importance of justifying fund terms, as well as the power of the limited partner.”

The research firm said CalPERS’ decision reflected a wider concern among investors that fees were the biggest challenge to their investment in private equity. Roughly 58% of respondents to Preqin’s survey of US public pensions said fees were their chief concern.

It’s important to note that CalPERS is not cutting its allocation to private equity, only the number of PE managers it employs.

Preqin’s research note can be found here.

 

Photo by  rocor via Flickr CC License

Chart: Negotiating Hedge Fund Expenses

cap negotiation

A recent survey asked investors: have you negotiated a cap on direct expenses with your hedge funds managers? This chart, above, displays the results.

The 2013 version of the same survey found that fees were the biggest obstacle for institutional investors looking to put money in hedge funds:

Screen shot 2014-11-07 at 2.27.22 PM

 

1st chart credit: Ernst & Young 2014 survey

2nd chart credit: Ernst & Young 2013 survey

General Partners Gain Upper Hand Over Pension Funds As Raising Capital Becomes Easier

balancePensions & Investments released an interesting report yesterday outlining the balance of power in the private equity world between general partners and pension funds.

In the last few years, the balance of power has shifted dramatically towards GP’s, according to the report.

From Pensions & Investments:

Until the 2008 financial crisis, general partners pretty much set the rules, leaving most limited partners little say on terms, including on fees and expenses, when they committed to funds. Then fundraising got harder, and even the most popular private equity managers had to accept investors’ demands for lower fees and expenses and a greater degree of transparency.

Now, the highest-returning general partners are regaining the upper hand.

“Certainly, the pendulum has swung more toward the GP compared to 2009,” said Kevin Campbell, managing director and portfolio manager in the private markets group at fund-of-funds manager DuPont Capital Management, Wilmington, Del. The firm was spun out from the pension management division of DuPont’s pension plan in 1993.

[…]

Said DuPont’s Mr. Campbell: “I’ve seen the pendulum of power change positions several different times during the last 15 years,” where private equity fund terms are determined by the GP and sometimes they are more influenced by the LP.

Strong-performing managers that retain the same team and the same investment strategy used when they earned their strong returns have the most influence over fund terms, Mr. Campbell said. These managers also are raising a fund that is similar in size to their last fund and they have a “good investor base,” meaning investors who routinely commit to their funds, he said.

[…]

Some are increasing their negotiating clout by getting large capital commitments from sovereign wealth funds before the first close, enabling them to give other interested institutional investors a take-it-or-leave-it deal, said Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC.

Part of the reason GPs have power over LPs has to do with fundraising. GPs are having an easy time raising capital, which means they don’t have any incentive to negotiate terms with LPs. From P&I:

It’s easier to raise capital now; funds are raised more quickly and general partners have more influence on terms, he added.

Indeed, some private equity funds are closing very quickly, with access to much more capital than they need. Instead of holding several fund closings — giving general partners the ability to invest the capital commitments before the final close — a number of firms are having “one-and-done” closings. Because there are asset owners willing to invest on those terms, the GPs have little reason to give in to limited partners demanding changes to fund terms.

For example, Veritas Fund Management in August held a first and final close at $1.875 billion for its latest middle-market private equity fund, after just three months of fundraising. And private equity real estate manager Iron Point Partners LLC in November closed the Iron Point Real Estate Partners III LP at $750 million, well above its $450 million target.

And KPS Capital Partners LP held a first and final closing last year of its $3.5 billion KPS Special Situations Fund IV, above its $3 billion target. It was KPS’ third oversubscribed institutional private equity fund, according to a statement from the firm at the time.

Read the full report here.

New Chicago Treasurer Makes Pension Funding His Priority

chicago

Chicago Treasurer Stephanie Neely is stepping down at the end of November.

Her replacement, Kurt Summers, said his priority will be fixing the city’s pension systems. From the Chicago Sun-Times:

The full City Council is expected to ratify the appointment of Kurt Summers at Wednesday’s meeting, but the incoming treasurer is not waiting for the vote before rolling up his sleeves and getting to work.

He’s already meeting with actuaries and pouring over the books of the four city employee pension funds.

They include the Municipal Employees and Laborers funds that have already been reformed and police and fire pension funds still waiting for similar action.

In 2016, the city is required by law to make a $550 million contribution to shore up police and fire pension funds with assets to cover just 29.6 and 24 percent of their respective liabilities.

Much of that money will have to come from Chicago taxpayers.

That’s because, unlike Municipal Employees and Laborers, police officers and firefighters do not get compounded cost of living increases.

The process of making the city’s pension funds healthy, he said, includes decreasing investment fees and increasing investment returns. In other words, “investing more efficiently and less expensively.” From the Sun-Times:

As a member of the board overseeing all four city employee pension funds, Summers said he can “make a dent” in the taxpayer burden by reducing investment fees and bolstering returns.

Summers noted that the firefighters and laborers pension funds are paying dramatically higher fees to their investment managers than the Municipal Employees and police pension funds.

“One fund is paying 80 percent more in fees. Another is paying 50 percent more. Yet, there’s one client: The city of Chicago. That’s real money. For fire, the value of that is about $2.5 million-a-year on $1 billion in assets,” he said.

“These kinds of things aren’t going to solve the kinds of holes we have. But any benefit we can find to invest more efficiently and less expensively is a benefit to taxpayers and retirees.”

Summers noted that the bill that saved the Municipal and Laborers Pension funds — by increasing employee contributions by 29 percent and reducing employee benefits — assumes an “actuarial rate of return” on investments of 7.5 percent-a-year.

That makes it imperative that the funds invest in the “right type of assets,” he said.

“If there’s market shock during that time that looks anything like what happened in 2008 — or even what we saw in July — then you end that period of fixed, graduated contributions with less funding than was modeled out in the legislation and there’ll have to be greater catch-up to get to 90 percent funding,” Summers said.

“We’ll have to have portfolio and asset allocation changes to protect our rate of return because ultimately, the taxpayers and retirees are relying on us to hit that number and, if we don’t, they have a bigger bill on the other side of the graduated payments structure.”

That doesn’t necessarily mean being conservative, he said.

“It’s a common misconception to say, `If I invest in the markets or fixed-income [instruments], we’re gonna be protected, but real estate, private equity or hedge funds are risky.’ That’s plain wrong,” Summers said.

“The reality is, you have just as much, if not more exposure to risk and volatility in the market with investments in basic public securities than you do with alternative products meant to mitigate risk and limit volatility. That’s the business I was in — trying to do that for clients around the world.”

As Treasurer, Summers would be a trustee of the city’s pension funds.

New York Pensions Paid More Fees To Wall Street In 2013-14, But Fee Growth Is Slowing

Manhattan

New York City released its annual financial report Friday, which gave observers a peek into a part of pension finances under growing scrutiny: investment fees paid by the city’s 5 major pension funds.

The fees paid by the city’s pension funds have grown since last year. But the rate at which they’re growing has slowed significantly.

From Bloomberg:

New York’s five pension funds paid Wall Street investment managers $530.2 million in the most recent fiscal year, an 8.5 percent increase, according to the city’s annual financial report released today.

The rate of growth in the year through June slowed compared with the previous period, when expenses paid to the city’s almost 250 managers rose 28 percent.

New York City Comptroller Scott Stringer, who serves as chief investment adviser to the pensions, has vowed to reduce fees and increase internal management. Fees erode returns crucial to funding benefits for New York’s more than 237,000 retirees and future payments to 344,000 employees.

Pension assets for police officers, firefighters, teachers, school administrators and civilian employees rose about 17 percent to $160.6 billion in the 12 months ended June 30, according to the report.

Eric Sumberg, a spokesman for Stringer, didn’t immediately respond to a request for comment.

The five pension funds included in the report are: the New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System of The City of New York (TRS), New York City Police Pension Fund, New York City Fire Pension Fund, and the New York City Board of Education Retirement System (BERS).

Collectively, the funds allocate 6 percent of assets to private equity, 2 percent to hedge funds, 29 percent to fixed income and 58 percent to equities.

Deutsche Bank: CalPERS’ Hedge Fund Exit “Has No Bearing” On Allocations Of Institutional Investors

The CalPERS Building in West Sacramento, California.
The CalPERS Building in West Sacramento, California.

Deutsche Bank says that after a series of meetings this month with institutional investors, they’ve concluded that CalPERS’ hedge fund exit “has no bearing on most investors commitment to the industry.”

From ValueWalk:

Deutsche Bank prime brokerage notes that hedge funds have been engaged in “extreme protection buying in equities” and said that the recent exit from hedge funds by CalPERS “has no bearing on most investors commitment to the industry.”

After speaking with the institutional investor community regarding their commitment to maintain their hedge fund allocations, Deutsche Bank’s Capital Introductions group reports this positive message that it says was bolstered by recent meetings with Canadian pensions and global insurance companies throughout the month, while a trip to Munich indicated an increase in hedge fund exposure from institutions.

[…]

Separate hedge fund observers, meanwhile will be watching numeric asset flow patterns in December and the first quarter of 2015 to determine on an objective basis if there has been a statistical move away from hedge funds.

Even if institutional investors on the whole aren’t moving away from hedge funds, the exit by CalPERS – and the public debate swirling around the investment expenses associated with hedge funds – has forced some hedge funds to reconsider their fee structures. From the Wall Street Journal:

Two titans of the hedge-fund and private-equity world say they are growing more open to reducing fees in the face of rising scrutiny of the compensation paid to managers of so-called alternative investments.

[…]

Mr. [John] Paulson [founder of hedge fund firm Paulson & Co.] said he feels “pressure” to act in the wake of “enormous numbers in compensation” for hedge fund managers. Mr. Paulson, 58, earned a reported $2.3 billion last year, counting both fees and the appreciation of his own personal investment in his funds.

“Institutions are becoming a little more demanding…they are putting pressure on the management fee and the incentive fee,” he said Monday during a panel discussion at New York University’s Stern School of Business.

Joseph Landy, co-CEO of $39 billion buyout shop Warburg Pincus, echoed Mr. Paulson’s experience.

“There are a lot of private-equity managers out there who can make a lot of money before they return a dime to investors,” Mr. Landy said. “Most of the pressure [to reduce fees] has been on the actual annual management fee.”

Neither he nor Mr. Paulson, however, were too concerned about any widespread threats to their businesses.

“We came out relatively unscathed from the crisis. We’re doing pretty much the same things we did as before [with] very little restrictions on how we invest the money,” Mr. Paulson said.

Paulson said he think more hedge funds will start using “hurdles”, a fee structure which prevents managers from collecting performance fees until they’ve met a certain benchmark return.

 

Photo by Stephen Curtin